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TECO Energy, Inc. (NYSE:TE)

Q1 2010 Earnings Call

May 4, 2010 5:00 pm ET

Executives

Sandy Callahan - CFO

John Ramil - COO & President

Mark Kane - Director of IR

Analysts

Ali Agha - SunTrust Robinson Humphrey

Paul Ridzon - KeyBanc

Mark De Croisset - FBR

Emily Christie - RBC Capital Management

Danielle Seitz - Dudack Research

Operator

Good afternoon. My name is Rachael, and I will be your conference operator today. At this time, I would like to welcome everyone to the TECO Energy’s first quarter results and 2010 outlook conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you.

I would now like to turn the call over to Mr. Mark Kane, Director of Investor Relations. Sir, you may begin your conference.

Mark Kane

Thank you, Rachael. Good afternoon, everyone and thank you for joining us this afternoon on TECO Energy’s first quarter 2010 results call and update on our 2010 outlook. Our earnings release was issued about 4:20 this afternoon and filed with the SEC. It also included at accompany financial statements. Slide for this conference call are available on our website at www.tecoenergy.com and the call will be available for replay through the website for approximately 30 days and will be available about two hours after the call.

In the course of our remarks today, we will be using non-GAAP measures there are tables in the appendix reconciling between the non-GAAP and the nearest GAAP measure. Also in the course of our call today, we will be making forward-looking statements. We caution use that there are many cautious that could cause actual results to differ materially from those that we will discuss today.

For a more complete description of the items that could cause these results to differ, we refer you to the risk factors discussion in our Annual Report on Form 10-K for the period ended December 31, 2009 as filed with SEC filings. Today, our Chief Financial Officer, Sandy Callahan will discuss our first quarter results and the outlook for the remainder of the year. Also with us today to assist in answering your questions are John Ramil, TECO Energy’s Chief Operating Officer and President.

With that, I’ll turn it over to Sandy.

Sandy Callahan

Thank you, Mark. Good afternoon everyone and thank you for joining us so late in the day today. Today I’ll cover our first quarter results and business drivers and then I’ll update our expectations for 2010, what we’re seeing in the Florida and local economies and final update you on our communications plan.

In the first quarter our GAAP net income was $55.8 million, compared to $34.7 million in 2009. Earnings per share were $0.26 in the first quarter, compared to $0.16 in 2009. Net income included a $16.2 million charge for early debt retirement and the final $900,000 charge related to last years restructuring action.

The $5.1 million of net gains in 2009 included the gain on the sale of our interest in the Guatemalan company, Navaga and a negative valuation adjustment auction rate security. Excluding charges and gains non-GAAP results were $72.9 million or $0.34 on per share basis, this quarter compared to $29.6 million or $0.14 of share in 2009.

We covered the quarter’s drivers in our earnings release, so I’ll just recap the highlight. Tampa Electric reported first quarter results that were substantially above last year. One of the most significant drivers for the quarter was the abnormally cold weather experience throughout Florida. It was the coldest sustain winter weather in the Tampa area in over 40 years.

We estimate that weather driven sales added $15 million to $20 million to base revenues in the first quarter. New base rates effective last year and on January 1 of this year added $25 million to $30 million to base revenues in the quarter. Retail sales increased 7.4% in the quarter driven by the colder than weather and we also saw four tenths of a percent customer growth, which is stronger than we expected in the current economy.

Total degree days were 37% above normal and 33% above 2009 first quarter. Due to the cold weather in the quarter, heating degree days were actually a 150% above normal, but cooling degree days were 85% below normal. Non-fuel operations and maintenances expenses were 9% lower this quarter and actually slightly below 2008 first quarter level, reflecting the benefits of last years restructuring and the timing of generating unit maintenances outages.

Peoples Gas also reported significantly higher results for the quarter, driven by the cold weather and the new base rates effective in June last year. We estimate that the cold weather added about $10 million to base revenues and the base rate increased added about $1 million in the first quarter. The rates approved in 2009 have a higher fixed component, but a lower volume related charges. This shift drives a disproportional effect to weather in the higher volume winter months, but it makes Peoples Gas less weather sensitive for the rest of the year.

Peoples Gas had two tenths of a percent higher average number of customers this quarter compared to last year, but these appeared to be mostly seasonal resident in turning to Florida for the winter. Following the normal spring pattern, we expect many of these customers to go back inactive status in the second quarter. Higher therm sales to commercial and industrial customers are partially driven by the weather and we’re seeing some customers actually increase usage.

For the unregulated companies, TECO Coal’s results for the quarter will well above last year, reflecting higher selling prices across all products and the benefit of the $3.3 million settlement of state income tax issue. Sales volumes were slightly lower at 2.1 million tons compared to 2.3 million in the first quarter of 2009. Volumes were affected in January and February by harsh winter weather that disrupted rail service and ended mining activities, but we were able to make up most of those times in March. The average selling price for the quarter increased 10% over last year to more than $76 per ton due to higher prices from met coal and the higher percentage of met coal in the mix compared to 2009.

Production cost increased 4%, which is higher than expected, the higher cost were driven primarily by reclamation activities earlier in the year than planned and lower productivity due to winter weather conditions in January and February.

TECO Coal’s effective income tax rate varies from quarter-to-quarter due to the mine specific effects of percentage depletion. Excluding the benefit from the income tax settlement at 23% this quarter it was close to the expected normal 25% effective rate.

First quarter net income at TECO Guatemala was significantly higher than its non-GAAP results last year. The biggest driver for the improved results was the San Jose Power Station, which operated throughout the quarter when compared to last year when it was out of service for most of the quarter due to extended unplanned outages.

TECO Guatemala was able to make spot sales from the San Jose plant throughout the quarter at good margins, primarily due to higher residual oil prices, which set the market clearing price for spot sales. The capacity payments for San Jose are calculated on a rolling 12 month availability factor and they’re reduced with that factor falls below 85% that results for the quarter reflect $2 million lower capacity payments as a result of last year’s outages.

Results for the DECA II companies, which include the regulated distribution company excess and its unregulated affiliates reflect the benefits of customer and energy sales growth and cost control measures of the utility and higher earnings from the affiliates. Offsetting this was the absence of earnings from Navega which was sold in the first quarter last year.

In the first quarter, we completed the major components of a debt management plan. We pandered foreign purchase $300 million of 7% debt and issued lower cost debt in a very favorable interest rate environment. We recorded the $16.2 million non-GAAP charge in the first quarter primarily related to the tender premium.

In April, we’ve retired $100 million of floating rate notes due in May and an additional $100 million of 2011 TECO Energy notes. We’ll record an additional $4.1 million non-GAAP charge in the second quarter for the early retirement of the 2011 notes. These actions reduced our refinancing risk associated with the significant 2011 and 2012 debt maturities. Now only $300 million of the holding company debt due on ‘11 and ‘12 remains outstanding, and we plan to retire that at maturity consistent with our debt reduction objectives. We’ll have the benefit of lower interest expense at TECO Energy.

We’re maintaining our 2010 earnings per share guidance that we provided in February in a range between $1.20 and $1.35 per share excluding charges and gains. We provided guidance on a range to accommodate variability in factors such as: weather where we’ve already seen an extreme variation from normal winter weather, the timing and strength of an economic recovery in Florida, and deliveries under our coal contracts and I’ll discuss these last two factors further in a minute.

This chart clearly shows the improved earnings trajectory that TECO Energy is on, the results shown here have been adjusted to remove charges and gains TECO merchant generation, TECO transport and synfuel to put it on a comparable basis to our current business components. In 2009’s actual results and in our forecast for 2010, you can see the benefit from the new base rates at both utilities and from improved coal margins.

Now returning to what we’re seeing in the local and state economies and the prospects for recovery. We’ve seen signs of improvement in the local housing market, but we believe a significant portion of that improvement may be driven by the homebuyer tax credit programs that effectively ended April 30. While we’re cautiously optimistic about the recovery in the housing market there is considerable uncertainty about the sustainability of these improvements without the benefit of the tax credit program.

Economists were mixed and their assessments of the timing of recovery in Florida. Lower employment is a key to our recovery and most forecasts are for unemployment to improve in 2010, but they disagree as to the timing. Despite the weather driven energy sales growth in the first quarter, we’re maintaining a conservative outlook for weather normalized energy sales energy sales for the rest of the year. We’re assuming slightly lower sales for the full-year due to the expected continued weakness among commercial and non-fast paid industrial customers.

There been pockets of improvement in some commercial and industrial sales, apparently driven by some of the federal stimulus dollars, including the homebuyer tax credit program, but it’s not widespread. We know the commercial energy sales growth lags residential on both the way up and on the way down. Until you see a consistent churn in the residential energy sales, we think it’s too early to forecast an improvement in commercial and on industrial. In short, although we’re encouraged by some of the positive signs, including some reason customer growth it’s too early to declare there’s a trend and we remain cautions on our outlook.

The next couple of sides are graphics that demonstrates some of the positive signs that we’ve started to see. The first slide is the unemployment trends that we’ve seen over the last 15 months the key point to note as a rollover and the Tampa area unemployment after January of this year. The unemployment rate from the Bureau of Labor Statistics declined from 12.7% to 12.3% in the most recent report and is now inline with the State.

The next slide shows our electric company customer additions in a couple of different ways. On the left are the monthly sequential customer ads. Starting last fall, the additions have been consistently positive after repeated dips into negative territory over the last three years. The graph on the right is our cumulative customer additions, which is showing a very positive up turns since last fall. The important note on this slide is actually the footnote. We’ve now recovered more customers that we disconnected since the start of the housing crisis.

This slide shows an important reason for the customer growth that we’ve reported the last two quarters. This is inactive, the percentage of inactive meters. Even in the worst month of the housing crisis, we were actually adding customers although in lower numbers. The problem was, that returning customers off after that we returning them on. Some of these were vacant builder inventory homes with minimal usage and some of them were foreclosures.

Starting early last fall though, the number of meters being turned off slowed, such as meter turn offs were no longer completely canceling out new customer additions. On this slide, we show existing home resales and new single-family building permits issued in areas served by Tampa Electric. Again, both graphs showed very positive trends.

Existing home resales have rebounded strongly from the low point in early 2009, and it is a combination of higher home sales and fewer disconnected meters that is now showing out as real customer growth. There are still a significant number of foreclosed properties in the Tampa markets, but the number of foreclosed properties as reported by RealtyTrac has been fairly stable at around 16,500 in the Tampa areas since the first of the year.

New single-family building permits have climbed significantly in the first quarter. This activity is probably home-buyer tax credit driven as well, but it has put construction workers back on the job and we’ve seen a slight pickup in energy consumption from some of the industrial customers that serve new construction.

As I’ve said, these are positive trends that are giving us cost for optimism, but there is a high degree of uncertainty about the strength of the Tampa area housing market absent the home-buyer tax credits.

Now turning to our unregulated operations; at TECO Coal, we expect improved results in 2010 from better margins. We now expect sales to be towards the high end of the 8.3 million ton to 8.7 million ton range that we previously provided. All of these sales were contracted at an average price of more than $75 per ton.

The range was originally provided, in case steam coal tons were deferred by our utility customers. We’ve had a couple of customers defer about 250,000 tons of steam coal which we’ve been able to fill into the PCI markets. This will shift our sales mix to about 35% specialty coals and the remainder of steam.

On the cost side, even though production costs were above our projections in the first quarter, we believe that the all-in total cost will still be between $65 and $69 a ton for the full-year. What we don’t know yet is the potential cost impact of the Upper Big Branch mine tragedy. We expect in the near-term that there maybe no inspection, which will impact productivity. Longer term, there will probably be new safety regulations that may add cost and impact productivity, but it’s too early to tell.

Market conditions for met coal are very strong. The domestic steel industry recently reported that the operating rate is up to 74%, this compares to the 40% operating rate for much of the first half of 2008. Asian demand for met coal has been and remained very strong with both India and China importing significantly more tons over the past year. Some recent forecasts have shown Chinese demands slowing in the second half of the year, but still at a level that’s driving higher prices.

The prospect of losing 2 million tons per year of high quality met coal from Massey Upper Big Branch mine caused an immediate price reaction in the met coal market, which is subsequently subsided somewhat as buyers down the replacement coal, but as strong as the met coal market is, the central apps steam coal market continues to lag it. The cold winter weather helped produce utility inventories, but they’re still high and natural gas prices have come down to a level that’s encouraging some fuel switching from coal to natural gas.

The positive factor there is that the veracious for met coal is allowing high quality steam coal tons to crossover to that market. When the steam coal market does recover based on better pricing in the met market, those tons will probably stay in the met market, which could lead to better pricing in the steam market. That being said, we don’t foresee an improvement in the steam market until the second half of the year as the earlier.

At TECO Guatemala, we expect the San Jose Power Station to operate more normally in 2010, following the unplanned outages that we experienced in 2009. As a result of those 2009 outages, the capacity payments will be lower in the first half of the year until the outage months roll out of the 12 month rolling average availability factor that is penalized those payments.

In 2009, the lower capacity payments reduced net income about $4 million in the second half of the year. We expect the capacity payments to return to the normal contract level on the second half of 2010. With oil prices near $80 a barrel, margins for spot energy sales can be between $20 and $40 per megawatt hour. We have seven to 10 megawatt of capacity above our contract generation available for spot sales depending on operating conditions.

First quarter spot sales were stronger than expected primarily due to high residual fuel oil prices, which is the fuel that sets the market clearing price, and lower than the normal hydroelectric resources due to a poor raining season last year. With a return to normal rainfall, we would expect spot sales to be at more moderate levels for the remainder of the year.

At the Alborada Power Station, we’re continuing our discussion with the Guatemala regulators to extent the current contract which expires in September for five years. At DECA II, which is the entity that holds our interest in EEGSA, and VAD remains unresolved with no definitive timeframe for resolution despite our continued efforts to resolve it amicably. Our ultimate option is to file under the Dominican Republic’s, Central American Free Trade Agreement, CAFTA, but this is not a quick solution.

In the mean time the management at EEGSA has taken steps to reduce cost to partially mitigate the effects of the lower VAD and EEGSA continues to experience strong customer and energy sales growth. We also have the small unregulated companies of DECA II that continued to contribute very good earnings.

Let me close with our plans to meet with and communicate with investors over the next two months. Our annual shareholder meeting is tomorrow morning and we planned to file our first quarter 10-Q on Thursday. We will be at AGA in Palm Beach in two weeks making a presentation on Tuesday morning and meeting with many of you over the two days.

We’ll be at the city conference in Washington on June 7; and at the EEI financial conference in New York in late June. Now I will turn it over to the operator to open the lines for your questions

Question-and-Answer-Session

Operator

(Operator Instructions) Your first question comes from the line of Ali Agha with SunTrust Robinson &company

Ali Agha -- SunTrust Robinson Humphrey

Sandy, first question, when you looked at the first quarter results as they have come out relative to the budget you had made for the year, could you give us a sense of how far ahead of your own plan they came out or where they pretty much as you expected?

Sandy Callahan

Well, honestly the only thing I would say in that regard is that we did have unusual weather in the quarter at the utilities and we quantified that in our earnings release and in my remarks as respects People Gas and Tampa Electric, but beyond that we typically don’t comment on budget, but we did give you good characterization of what we saw there, that wad different in normal weather.

John Ramil

We budget for normal weather, Ali.

Ali Agha -- SunTrust Robinson Humphrey

Right and I understood. Second question on the Florida regulatory situation, in my understanding that the senate did not confirm the two new regulators before they adjourned, could you give us a sense of what that means and could we expect a change in the composition of the commission next year how should we read this

John Ramil

Yes, Ali this is John Ramil, the senate actually alluded to not confirm, commissioner Clement and commissioner Stevens, with that they have 30 days to vacate their office and a process starts over, their audience that noticed that and applications or commissioner are being accepted by the nominating committee. The last date to file for that is coming up towards the end of May, I think it’s May 27th, then the committee will review them and propose a list to the Governor and probably the earliest just that all happened, if you looked at the minimum time lines is somewhere around the second week of July and new commissioners could be appointed.

Ali Agha -- SunTrust Robinson Humphrey

John, just to clarify if I could, since the Governor is still that till November, is it possible or even likely that he renominates the two outgoing commissioners or is that …

John Ramil

He can only do that if they are on the list that the nominate committee send back to him but that’s probably unlikely scenarios since the nominating committee is composed at the legislature

Ali Agha -- SunTrust Robinson Humphrey

I see, so we should expect two new commissioners probably later this year

John Ramil

That’s the most likely expectation.

Operator

Your next question comes from the line of Paul Ridzon with KeyBanc

Paul Ridzon - KeyBanc

Could you talk about the higher than expected costs you had at the mining and what drove that and is that temporary or is that something that could persist?

John Ramil

Sandy, you may…

Sandy Callahan

Yes, there were really two factors that played into that and one is that we had some reclamation activity that occurred all in the first quarter rather than being spread out as was contemplated in the overall call so that made the quarter little bit lumpy. The other factor is that January and February and the winter weather which helped us so much down here on Florida in terms of energy sales was very rough on the coal company in terms of production difficulties in surface mines, so we lost some productivity during on January and February. So I would look at that as a first quarter specific phenomena and not a trend for the rest of the year, as I said, we do expect to be within the cost range that we anticipated further reminder a year, for the full year

Operator

Your next question comes from the line of Mark De Croisset from FBR.

Mark De Croisset - FBR

Hi, thank you very much, actually from FBR. The whether benefit was pre-tax, I assume based on your commentary that’s 15 to 10 and the other 10 at people gas is that correct?

Sandy Callahan

That’s correct, that was the impact on base revenues.

Mark De Croisset - FBR

Okay, so that looks like $0.05 to $0.06 impact for the quarter is that about correct?

John Ramil

It’s in that right ballpark, yes.

Mark De Croisset - FBR

I thought, on the hedge positions of TECO Coal, is that something you’re no longer doing and if not can you give us color at how the contracting is evolving?

John Ramil

Mark, I was looking for the same slide in my pocket, but it really had a change sets the one that we gave you back in February. There hasn’t been a lot of contracting activities and lot of talking with customers, but no contracting activity. If you remember back end we were about 50% contract for 2011.

The largest majority that been steam coal. There’s a little of carryover meeting there, but it’s mostly steam and that’s a pretty decent prices, our average contracted price for next year to about $75 as well, and then for 2012, we’re actually less than 10% contracted, but the real upside here is about 7% of our sales of the whole legacy contract that start with the three and the pricing are gone in 2012.

Mark De Croisset - FBR

Is the pace of contracting changing based on the price of coal or is there market dynamic that’s giving your customers pause about contracting over the longer term?

John Ramil

Well, as Sandy mentioned earlier, steam market is still soft. We’re looking for some recovery in that second half of the year. The net contracting usually occurs towards the end of the year, but that could move a little bit earlier depends on how people see the market, we’re seeing that happen, we see that verily, we seen that little late, but not quite deserve anything here.

Mark Kane

Paul, just a correction on the weather benefit we’ve been punching some calculator buttons, while John was speaking, it’s probably stronger than the $0.06. It’s probably $0.78 for the quarter.

Operator

Your next question comes from the line of Emily Christie with RBC Capital Management.

Emily Christie - RBC Capital Management

Just couple one on coal question. In terms of the product mix, you mentioned 35% specialty coals, is there if I kind of the maximum capacity you have from coal or going forward in 2011, could we see even a stronger percentage?

John Ramil

We’re going to try to squeeze much as we can out and that 35% already reflects some of that is typically more 33% of or so. So, we’re getting a little more and where we can, we’re looking for ways to move a little bit more too either PCI, the met market even if it’s a lower quality, but its small amount. It’s trying seven to 10,000 tenants here and there. We are really fortunately put together in ship. What we have contract before is, we’re able to produce this year mostly contract and moving ahead it’s going to be in the mid 30s range most and the most.

Emily Christie - RBC Capital Management

Are your specialty coals staying domestic or any of them going directly overseas?

John Ramil

No, they go overseas in the European market.

Mark Kane

It’s about 50/50 domestic European.

Emily Christie - RBC Capital Management

Just one other question in terms of the guidance again in the quarter, so $0.08 roughly $0.78 benefits from weather, can we now think about your guidance is sort of narrower band towards the upside or there maybe other offsetting factors that you’re now seeing throughout rest of the year? Thanks.

Sandy Callahan

Weather can be good to us and weather can be bad to us and rainy August is just bad to us as cold January. So our quarter does not year made, so we’re being conservative at this chart?

Operator

(Operator Instructions) Your next question comes from the line of Danielle Seitz with Dudack Research.

Danielle Seitz - Dudack Research

I’m just wondering that giving the all of the economic analysis have been made done for Florida at this point. What do you anticipate the type of growth that you will see I mean in a wide range understand in terms of demand for next year? Is it true early to tell?

John Ramil

Well, Danielle let me just put a little perspective, given what we seen in the last two quarters, you might recall going back to the guidance we gave in any of this year. We talked about for the electric company this year be in kind of flat in customer growth and sale and then about a half percent growth next year, built it up to a new kind of longer term growth rate about 1.5%.

What we’ve seen is that fourth quarter of last year and for the first quarter of this year. We go back and we would look hard again at the full effective this year and next year. In the cases those are numbers going to move up. Sandy, questioned a lot of good numbers in the first quarter, one of my favorites is the four tenths of a percent customer growth and as follows two tenths of a percent growth in the fourth quarter of last year. So those are kind of new numbers and not factored into our long term think yet.

Danielle Seitz - Dudack Research

So, it seems like your previous forecast might be bit conservative, are you looking at now?

John Ramil

That’s what those two quarters will tell us, but I’ll tag on that what Sandy said earlier, we’re cautious. We’d like to more a trend before more bullish on the economy. We had what about mark 18 funds of no growth to negative growth. So we’ve had two quarters in row. So we’ve still have more negative news and positive news, but we’re on the right track.

Operator

(Operator Instructions) There are no further questions at this time.

Mark Kane

There is no further question at this time. Thank you all for joining us this afternoon and staying into the early evening and that concludes TECO Energy’s first quarter conference call. Thank you very much.

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